Suit claims AOL cost Alaska millions

Biggest losses were to permanent fund, but dividends weren't unaffected, state says

Posted: Friday, April 02, 2004

Communications giant AOL Time Warner cost the state of Alaska more than $70 million through manipulations of its publicly traded securities, Alaska Attorney General Gregg Renkes alleged Thursday.

A lawsuit filed Thursday claims America Online and Time Warner misrepresented facts in connection with their January 2001 merger.

"We are no longer going to rely on the federal courts located in far-flung jurisdictions to protect our interests," Renkes said. "The defendants' actions violated Alaska's state law and so we are seeking recovery right here in Juneau Superior Court."

The state government's biggest loser from AOL Time Warner investment was the Alaska Permanent Fund, which lost $50 million, Renkes said. However, it had no material effect on the permanent fund dividend, the check sent annually to all Alaskans, because the loss represented less than 0.2 percent of the $28 billion fund.

The loss sustained by the other funds, totaling more than $20 million, is less than 0.1 percent of the funds' total value, Renkes added.

His office reported that in addition to the $70 million and interest calculated at 8 percent a year, the suit seeks punitive damages to deter future fraudulent corporate conduct.

Alaska remains a participant in a federal lawsuit, which is awaiting class certification in federal court in the Southern District of New York. The lead plaintiff is the Minnesota State Board of Investment. Independent lawsuits against AOL Time Warner have been filed by investors including the University of California and the states of California, New Jersey, Ohio, Pennsylvania and West Virginia.

The Alaska suit alleges violations of state trade and commerce law and misrepresentation. It also alleges that the accounting firm of Ernst and Young and securities underwriter Morgan Stanley and Co. were negligent in their professional capacities with AOL and Time Warner. The lawsuit also names five corporate officers and up to 100 unidentified individuals.

The 56-page lawsuit alleges a "scheme to defraud the investing public," Details on pages 13 to 31 of the complaint include transactions in which AOL allegedly misrepresented income from deals to package its software on Gateway and Compaq computers, and the merged company allegedly forcing the Golf Channel to spend $15 million in online AOL advertising in order to have its programming aired on Time Warner Cable systems.

Tricia Primrose Wallace, a spokeswoman for Time Warner in New York City, would not comment on the suit.

"As a matter of corporate policy, we don't comment on pending legal matters," she said.

Information from Renkes' office said that a share of Time Warner stock that traded for more than $60 before the merger was trading for less than $17 Thursday.

Renkes said he is committed to protecting $50 billion of invested state funds from securities fraud. As defendants, he listed the state Department of Revenue, State Pension Investment Board and the Alaska Permanent Fund Corporation.

AOL and Time Warner announced their intention to merge on Jan. 10, 2000, in a deal valued in excess of $100 billion, according to the suit.

"At the time, AOL appeared to be a successful company due to its reportedly large subscriber base and substantial advertising revenues," it states. "However, by early 2000, the Internet boom had begun to decline, and many of AOL's advertising clients were experiencing significant business declines or facing bankruptcy."

Prior to the merger, Alaska's state funds had about 1.9 million shares of AOL stock and nearly 1.2 million shares of Time Warner stock, the suit states. The AOL shares were converted directly to shares in the new company, and the old Time Warner shares were converted to nearly 1.8 million shares in the new company.

Between the Jan. 11, 2001, merger and March 28, 2003, the state funds bought almost 2.7 million shares in the new company, the suit adds.

Specifically named as individual defendants are Stephen M. Case, former chairman of the board of the merged company who resigned in 2003; Robert W. Pittman a former chief operating officer of the company who resigned in 2002; J. Michael Kelly, chief financial officer for the company; David M. Colburn, who reported to Pittman and was terminated in 2002; and Eric Keller, who reported directly to Colburn.

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